By Edward Krudy
NEW YORK (Reuters) - Wall Street stocks were set to fall on Wednesday after a sharp snap-back rally in the last session and as investors' well-worn fears about the economy and high levels of public debt looked set to generate more volatile trading.
Stocks zigzagged on Tuesday after the U.S. Federal Reserve promised to hold interest rates low for at least two years, before the S&P 500 index rallied 5 percent into the close. But the Fed's statement also underlined the struggling economy and was a reminder markets would likely remain choppy in the near term.
"We are clearly in an extremely volatile period here," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont. "There is a lot of money shifting, moving around in here, and that is just going to bring in tremendous volatility."
Even with Tuesday's rally, the broad S&P 500 is down 14 percent from a peak at the end of April after falling precipitously over the last two weeks -- a period that saw an escalating financial crisis in Europe, political gridlock in Washington, and a downgrade of the U.S. credit rating.
"At this point of time, investors' heads are spinning," said Oliver Pursche, president at Gary Goldberg Financial Services in Suffern, New York.
"We anticipate further volatility," he said. "I even think we are going to retest the lows that were set on Monday."
S&P 500 futures lost 13 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures fell 110 points, and Nasdaq 100 futures dropped 29.5 points.
An increase in bullish sentiment last week, a contrarian indicator, suggests stocks may have further to fall, according to a weekly survey by research group Investors Intelligence. Bullish investors rose to 47.3 percent from 46.3 percent last week as many saw the market's plunge as an entry point.
Tokyo's Nikkei average closed up 1.1 percent on Wednesday. European stocks rose 0.3 percent adding to the previous session's rebound from a 20 percent dive over the last 2-1/2 weeks.
Gold rose more than 1 percent, hovering just below a lifetime high around $1,778 an ounce struck in the previous session.
In corporate news, HSBC Plc is selling its $30 billion U.S. credit card arm to Capital One Financial Corp for a premium of $2.6 billion, as Europe's top bank streamlines its mammoth operations.
Macy's Inc reported higher-than-expected quarterly profit and raised its profit forecast for fiscal 2011, saying it was optimistic about sales this autumn. Its shares rose 3.2 percent to $26.25 in premarket trading.
(Reporting by Edward Krudy; editing by Jeffrey Benkoe)